Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts
Financial Management, Forthcoming
Posted: 21 May 2016
Date Written: May 1, 2016
This paper examines whether gains in bank megamergers occur due to efficiency improvements or the exercise of market power using financial statement line item forecasts from Value Line to infer the effect of the merger on prices and quantities. The average megamerger is associated with cost-efficiency improvements. In the cross-section, efficiency gains are limited to market expansion mergers while market overlap mergers and Too-Big-To-Fail (TBTF) mergers exhibit monopoly gains. Efficiency gains dissipate when the resulting megabank size exceeds $150 billion in assets or 1.5% of GDP indicating that banks thought to be TBTF are likely to be “Too-Big-To-Be-Efficient” (TBTE).
Keywords: Bank mergers; Efficiency gains; Market power; Too-Big-To-Fail
JEL Classification: D4, G21, G34
Suggested Citation: Suggested Citation